The Financial Accounting Standards
Board (FASB) routinely selects issues
in which to expand existing financial reporting guidelines. One, FASB Interpretation (FIN) No. 48, effective Jan. 1, 2007,
addresses specific tax positions taken (or
not taken) in a tax return. Not all considerations of the effects of FIN No. 48 can wait
until the year’s end. Most audit firms suggest that their clients include a disclosure
in this year’s (2006) financial statements
about the potential effects of FIN No. 48 to
notify readers that a new guideline may
affect the 2007 financial statements.
Smart Business spoke with Paul Etzler, a
senior manager with Skoda, Minotti & Co.,
to learn more about FIN No. 48 and its
effects on corporate tax positions.
Who must comply with FIN No. 48?
Every organization that issues financial
statements in accordance with U.S. generally accepted accounting principles (GAAP)
must consider the impact of FIN No. 48 for
disclosure, and possibly adjustment, to
their financial statements. Nonprofits, regulated industries and pass-through entities
are not exempt. The same standards for
considering and reporting FIN No. 48 apply
to public and nonpublic companies.
Moreover, subsidiaries that do not file a
separate federal return but issue a GAAP
financial statement need to comply with
FIN No. 48 requirements.
What taxes must be considered?
FIN No. 48 includes all taxes levied on
income for any jurisdiction — local, state,
federal or international. However, FIN No.
48 does not include consideration of other
taxes that the organization may pay, such
as taxes on net worth, activity or privilege
taxes, sales, and real and personal property taxes. The organization must still be cognizant of potential liability and uncertainty
related to such taxes, in accordance with
existing guidelines.
The potential effect of complying with FIN
No. 48 is a liability on the balance sheet.
How is this calculated?
Once all tax positions are identified and
analyzed, then a mathematical calculation
determines the amount of liability; that is,
an estimate of the amount that the organization would need to raise if the taxing
authority won and it lost. In addition to this
estimate of potential liability, the organization must calculate penalties and interest
on the liability and add that to the total.
Thankfully, litigation costs and professional fees need not be estimated and added to
the liability.
How does FIN No. 48 affect state tax issues?
FIN No. 48 forces the organization to
evaluate tax positions taken on its tax
returns for all ‘open years.’ The statute of
limitations is generally three years. However, the statute of limitations clock does
not start ticking until the tax return is filed.
Therefore, nonfiling in a particular jurisdiction may go back several years (or decades, for that matter). This causes the organization to take another hard look at
‘nexus’ issues, that is, the organization’s
activity in each state.
What is the effect of these disclosures in an
organization’s financial statements when
dealing with the IRS?
FIN No. 48 has been called the ‘roadmap
for the IRS.’ Whether due to errors, poor
judgment or aggressive tax planning, the
accountant must assess — and the independent auditor audit — the possibility that
a tax position will be challenged by the taxing authority and the probability of losing
the battle. This assessment and auditing of
the assessment needs to be fully disclosed
on the organization’s financial statements.
How often does the organization need to
assess its tax positions?
Commensurate with issuing each financial statement, the organization must address any changes to the circumstances
surrounding a tax position. Any change
must be new information, not a reconsideration of old information. The most likely
reasons for having new information include a settlement with a taxing authority,
expiration of statute of limitations related to
the return or the increase in the certainty
that a tax position will be upheld. It is important to remember that case law and interpretations change all the time. The organization is responsible for addressing such
changes as they pertain to its tax positions.
What can a business owner do to understand
and comply with these new guidelines?
As with most new pronouncements or
regulations, the first year of implementation is the most difficult, but help is available. Public accountants and consultants
have put together several Q&As and have
addressed a multitude of scenarios to help
small business owners.
We suggest beginning the investigatory
process now. Any interim and quarterly
financial reporting must include the full
impact of FIN No. 48. Additionally, if certain tax positions are evaluated as uncertain, then the organization can act now to
avoid potential liability from the taxing
authority.
PAUL ETZLER, CPA, is a senior manager with Skoda, Minotti &
Co., a CPA, business and financial advisory firm, based in
Mayfield Village. Reach him at [email protected] or
(440) 605-7150.